A guide to construction billing methods and best practices

Construction work relies on a constant flow of invoices, approvals, and payments throughout the project lifecycle. Just one delay in the payment process can affect virtually every part of the project, from day-to-day cash flow management to whether the next phase of work can start on time.

Construction companies can avoid these pitfalls by gaining a practical understanding of how construction billing works. This guide covers the most popular billing methods, who’s typically involved in the process, and common challenges to watch out for.

What is construction billing?

Construction billing refers to the process of requesting, tracking, and receiving payments for completed work throughout a construction project. 

In most industries, this process is pretty straightforward: send an invoice and get paid. But construction has a wide range of contract types, each with its own payment structure. These systems might be relatively simple, such as linking payments to milestones or progress percentage. Or they might be more involved, like adjusting invoices based on incurred expenses or charging per unit.

Who is involved in construction billing? Key stakeholders

Construction billing typically involves at least the following parties:

• Project owners work with contractors to define a project’s scope of work and budget. Their main goal is keeping the project on track and within financial limits. They also review and approve payment requests.
• General contractors (GCs) coordinate billing across the project team, managing submissions and collecting payments. They also make sure vendors and subcontractors get paid in a timely manner.
• Subcontractors sign lien wavers and collect the same paperwork from any vendors or secondary subs they worked with. This prevents them from putting a lien on a finished build in exchange for payment. Subs submit these documents plus payment applications to the GC, who verifies everything is accurate. Once owners pay GCs, they use some of those funds to pay subs. 
• Construction accounting and finance teams navigate the numbers, including construction invoice processing and payment tracking, cash flow handling, and payroll management. It’s also their job to monitor financial compliance with regulatory and contractual guidelines.
• Project managers own day-to-day tasks like validating completed work and approving billing quantities. They also step in to investigate when payment discrepancies arise.

Core components of the construction billing process

Accurate construction billing depends on several key elements.

Retainage

Retainage is a portion of the contract value, typically 5–10%, owners withhold until the final punch-list items and lien wavers are complete. GCs typically hold back the same percent while paying subs. 

Many states cap retainage rates for public (and sometimes private) projects. For instance, owners in California can only retain 5% until jobs are completed and accepted. New Mexico, on the other hand, prohibits retainage on most projects. Some states, like Alaska and Georgia, don’t have statewide caps at all.

Contract terms

Contracts clearly define billing cycles and payment timing, approval methods, and retainage requirements so everyone is on the same page. Overlooking these details can result in disputes and payment delays.

Payment applications

Payment applications are requests for payment that outline key project details, such as work completed, materials supplied, and retainage. They also include supporting documentation like receipts and lien wavers. 

In the construction industry, progress billing often uses standardized forms from the American Institute of Architects (AIA), such as AIA G702, Application and Certificate for Payment, and the accompanying AIA G703, Continuation Sheet, which breaks the payment down by line item.

Schedule of values (SOV)

SOVs are foundational documents in project-based accounting, the framework behind methods like progress billing and lump sum billing. These itemized lists break down the cost of each task associated with the project.

Change orders

A change order is an approved modification of a project’s scope of work. Because it usually affects contract value, recording it in billing documentation is critical for accuracy and avoiding payment disputes.

What are the most common construction billing methods?

Here’s a look at the most popular ways to handle billing for construction projects.

Progress billing

Contractors bill monthly against the schedule of values, claiming a percentage complete on each line item. Every pay application withholds retainage. Progress billing is a good choice for major long-term projects, such as highway construction or multi-year commercial developments.

Since payments come in regularly, cash flow is more predictable, which is essential for large projects that require ongoing funding. But this approach also requires detailed progress tracking, which can lead to disputes that delay payments if contractors and owners disagree about estimates.

Lump sum billing

Contractors and owners agree on a fixed price for the entire project in advance. Payments with a lump sum contract are usually tied to milestones or schedules so the contractor gets paid in installments drawn against the total cost as work progresses. This makes payment amounts predictable and lightens the administrative workload since tracking completion is less involved.

This method is a strong choice when there’s a well-defined scope of work to bill against, such as building a single-family home from a finalized blueprint.

Time and materials billing

Contractors invoice owners based on real labor hours, materials and equipment expenses, and other procurement costs. This method is a better fit for projects where scope shifts frequently or it’s difficult to put a number on the total cost. That’s because billing is based on the work actually performed instead of a preset total.

Cost-plus billing

Owners reimburse the contractor for direct expenses like materials, labor, and equipment, plus an additional fee or percentage markup over the total cost to cover the contractor’s overhead and profit margin. Cost-plus contracts are well-suited to projects where the scope has unpredictable requirements or changes often, such as highly custom architectural builds.

Because every payment has to align with actual incurred expenses, cost-plus billing takes in-depth job costing to track and justify each bill.

Unit price billing

Owners and contractors work together to break down the project into individual units of work, such as cubic yards of concrete poured. Contractors usually bill owners as each unit or specific quantity of units is completed.

Unit price billing is a popular option when final project quantities vary. Because payments are based on the number of units completed, the total cost simply adjusts up or down with the actual work.

Construction billing challenges to look out for

Construction businesses face a variety of potential pitfalls that get in the way of smooth and accurate payments. Here are some of the obstacles construction companies contend with on a regular basis.

Subpar billing documentation

Missing or incomplete information on billing documents is frequently the culprit behind delayed approvals. It can also cause trust-eroding errors, such as unsupported charges leading to overbilling.

Change order disputes

When contractors don’t document changes sufficiently, or those changes happen before getting approved, payment disagreements usually aren’t far behind. Without a clear paper trail, the additional work can be hard to bill for later.

Payment delays

Most delays are structural, not administrative. Pay-when-paid clauses mean a sub waits on the owner cycle no matter how clean their pay app is. Architect certification of a G702 adds a review cycle of its own before anything gets released. And a GC usually can’t pay a sub until every lower-tier lien waiver is in hand, so one missing supplier waiver holds up the whole tier.

Communication breakdowns

Sometimes billing errors show up simply because a request got lost in translation or wasn’t as clear as it should have been. When coordination fails between project and finance teams, invoices can end up out of sync with the work that was actually approved, creating delays.

Compliance gaps

One missing conditional waiver from a second-tier supplier, or one week of certified payroll that never got filed, is enough to freeze an entire pay application on a public job. Audits and noncompliance fines can also delay or even halt the process.

Best practices for fast and accurate construction billing

These best practices help finance leaders create more efficient billing processes while improving accuracy.

Standardizing billing procedures

A defined billing workflow means the PM knows the date quantities are due, the owner knows what backup arrives with the pay app, and the sub knows which waiver form gets accepted. Nobody’s guessing in week three. Using construction billing software takes standardization a step further through automating repetitive tasks like labor cost calculations and approval routing.

Keeping project documentation clean

Organizing billing records, approvals, and costs and making sure they’re accessible keeps documentation reliable instead of becoming a source of errors.

Monitoring billing status and aging

Keeping a close eye on outstanding invoices and payment timelines supports better cash flow management by catching potential delays while there’s still time to address them.

Tracking change orders in real time

Document and approve change orders as quickly as possible. This prevents payment disputes by settling what owners owe before the details fade or new work builds on an undocumented change.

Reviewing contracts early

Taking the time to fully understand payment terms, retainage requirements, and documentation expectations during the preconstruction planning phase means contractors and finance leaders have plenty of room to ask clarifying questions. It also keeps issues from showing up in the first place because it sets clear expectations before work gets underway.

Automate accounts payable workflows with Miter

Getting construction billing right takes precise documentation. Before releasing a single subcontractor payment, GCs need to tie invoices to the right cost code, plus verify the accuracy of lien waivers and pay applications. 

Some construction companies take the manual approach or use generic accounting solutions that lack construction-specific features. That often comes with more errors and slower approvals dragging down efficiency across the board.

Miter Accounts Payable was designed for contractors and finance leaders first. Teams can automate their entire payment workflow, starting from bills generated automatically from vendor invoice emails. Eliminate convoluted email chains through automated routing, getting each approval to the right project manager based on each line item’s job costing. Once approved, let Miter take care of vendor payments through ACH or mailed checks.